As more countries queue to join the euro area, the implications of enlargement for the European Central Bank are coming into focus

THE euro has passed its first birthday, weaker than some of its parents would like but looking solid enough. The new currency's guardian, the European Central Bank, is starting to find its feet. It is tempting to assume that the framework for monetary union is all but complete. Tempting, but wrong: several important issues—including the future policymaking structure of the ECB itself—remain undecided and are only now attracting serious thought. Most important of all may be the European Union's—and so the euro's—enlargement. In a recent speech, Wim Duisenberg, the ECB's president, admitted that this will have “deep and wide-ranging consequences” for the ECB. It may even be the key to the future evolution of ECB policymaking.

The European Union is midway through detailed accession negotiations with six countries, and is due to begin talking to another six next month (see map). The first batch includes Estonia, Hungary and Poland, each of which hopes to join in 2003-04. All countries joining the EU are required to adopt the euro sooner or later. But the European Commission (which conducts accession talks), the ECB, and some of the governments applying to join are still debating how long an interlude there should be between a country's accession to the EU and its adoption of the euro.

The commission thinks candidate countries should take their time. EU law requires at least a two-year gap after a country joins the EU before it enters monetary union. During that time it must show that it can keep its national currency stable against the euro. In a report published in October the commission also said that governments should not necessarily rush to meet even that timetable, and that “attempts at too early adoption of the euro could be highly damaging.”

In public, the ECB is more equivocal. Candidates are free to adopt the euro unilaterally, it says, but they must realise that it would neither take them into account when making policy, nor stand behind them as lender of last resort. ECB officials fret that “euro-isation” by the bigger East European countries, such as Hungary and Poland, could loosen the bank's control of the supply of euros. In private, they also worry that countries that adopted the euro early might find their domestic economic policy constrained at exactly the time when flexibility is needed. Jose Luis Alzola, an ECB-watcher at Salomon Smith Barney, says that the ECB's main message to euro-zone wannabes at an enlargement seminar in November was: rush at your peril.

Some candidate countries, and some independent experts, challenge these arguments. They see no reason to wait for the lower interest rates and transaction costs that come with the single currency. Slovenia has argued that candidate countries should be given credit for a record of exchange-rate stability before joining the EU—and so have the possibility of joining monetary union at the same time. Now Estonia, one of the two or three applicants most advanced in its economic reforms, has taken the debate a step further. It is talking about adopting the euro in 2002, the year the currency takes physical form.

Estonia would be in an unusually strong position to do this, because its currency, the kroon, has been pegged tightly to the D-mark since 1992, by means of a currency board. This means that every kroon in circulation is fully backed by a fixed amount of D-marks. So for most practical purposes the kroon is already the euro by another name. Estonia's prime minister, Mart Laar, finds the idea of unilateral adoption “attractive”. This week he set up an expert group, under his economic adviser, to review the arguments.

Daniel Gros, of the Centre for European Policy Studies, a Brussels think-tank, believes it might well be wise for Estonia to switch from its currency board to full euro adoption even before joining the EU. There would be no shift in monetary or fiscal disciplines. There would, on the other hand, be a useful fall in interest rates, because investors would no longer demand a premium for the risk that the exchange-rate peg would be broken. But then, after Estonia joined the EU two or three years later, would the EU still insist it served its two-year probation before getting an ECB seat? Perhaps, for fear of setting a precedent. But in economic terms, says Mr Gros, “it wouldn't make sense.”

It is hardly surprising that the ECB wants to go more slowly. Although inflation is falling in most East European countries, it is still far higher than in the euro zone. Financial markets already fret about the difference in growth and inflation rates between the single currency's “core” countries and those on the periphery, such as Ireland and Portugal. Alison Cottrell of PaineWebber, an investment bank, points out that enlargement will bring far greater divergence. This could make the monetary tea leaves tougher to read.

Enlargement also raises questions about the institutional structure of the ECB. Some fear that the euro zone's expansion by 12-16 countries over the next few years could paralyse monetary policymaking. But others, such as Tommaso Padoa-Schioppa, the executive board member of the ECB responsible for enlargement issues, are more sanguine. He argues that “enlargement will not necessarily make things more cumbersome. On the contrary, it may actually serve to strengthen efficiency.”

This applies particularly to the bank's governing council, which decides monetary policy. At present this has 17 members: the ECB's six executive-board members, plus the governors of the euro zone's 11 national central banks, appointed under the bank's “one member, one vote” system. But in a few years, the council could have more than 30 members—an unworkable number, for several reasons: council debates could end up shallow and fractured; and the executive board would be swamped by national governors, more inclined to a regional rather than a supranational view.

The ECB argues that its council members are not national representatives. But no country is likely to give up its right to a seat as the council grows. East European countries, however small, expect their voice to be heard alongside giants such as France and Germany. “Those are the rules of the game, ” says Gyorgy Suranyi, president of Hungary's central bank. He sees “no reason to deviate from them when our turn comes.”

What is the solution? One idea is to create constituencies similar to those at the IMF. A single governor would represent a cluster of countries: the Estonian governor, say, would vote for the Baltic States, and so on. But the system seems to have few fans. Many ECB officials hate the idea, because it entrenches regional thinking. A radical alternative would be simply to remove national bank governors from the board. Politically, however, that outcome is hard to imagine.

More likely is rotation. At America's Federal Reserve, all 12 regional governors attend rate-setting meetings, but they take turns filling the five seats on the voting committee. The ECB's current board is thought to favour this type of approach, although the decision is in the hands of politicians. Any change would require an amendment to the Maastricht treaty. And even fans of rotation admit it brings problems. Should big countries get bumped off the voting panel as often as tiny countries? And what would the markets make of a council including governors from Latvia and Cyprus, but not Germany?

With the euro still in its infancy, it may still be too early for clear answers to such questions. And it may be in part for fear of upsetting the markets, by raising questions for which there are still no answers, that reform of the ECB has not—so far at least—been put on the agenda of the EU's intergovernmental conference, which begins next month and runs to the end of the year. Since this is intended precisely to decide how to make EU institutions and procedures ready for enlargement, the omission of the ECB is not just odd; it is alarming.